Thursday, May 24, 2012

Brazil, Mexico try to stem currency declines

Brazil and Mexico finally intervened in the FX markets in an attempt to support their currencies, which have been battered by capital outflows. The risk with this sudden depreciation is inflation, something that Latin American nations have plenty of experience with.

Bloomberg: - Brazil’s real had the biggest gain in seven months and Mexico’s peso pared losses after policy makers in both countries propped up their currencies amid a selloff in emerging-market assets.

The real rose 2.8 percent to 2.0326 per U.S. dollar at the close in Sao Paulo after the central bank sold currency swap contracts at an auction for the third time in the past week. The peso fell 0.6 percent to 13.9887 per U.S. dollar, paring losses of as much as 1.2 percent after the monetary authority sold $258 million at an auction.

The real has suffered from an “aversion to risk” as it plunged 6.1 percent this month, said Carlos Hamilton, the Brazilian central bank’s director of economic policy. What concerns policy makers is excess volatility, not any particular exchange rate, Hamilton said at an event in Curitiba.

USD-BRL (Brazil real)

Here is a comment from Goldman on the topic:

GS: - In our assessment, at this stage a BRL above 2.10 generates some discomfort among the authorities as it could impact the inflation dynamics. We are of the view that rather than trying to enforce a ceiling the central bank is trying to anchor the BRL which has been weakening faster than other regional currencies. Were the external backdrop to deteriorate further and other regional commodity currencies come under pressure, the central bank may validate additional moderate and orderly BRL depreciation.

As flight of capital out of these nations continues, this will become an ongoing battle. In the long run weaker currencies will help these nations become more competitive - as long as they are able to tame inflationary pressures.